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May 29, 2014

That $41 Trillion Wealth Transfer Now Officially $59 Trillion

But financial advisors should understand that nearly all of that wealth is coming from a small segment of the wealthiest households

Had there been no Great Recession, the amount transfered over the same period would be $73.3 trillion.

The vaunted $41 trillion wealth transfer that is the subject of every other broker-dealer conference since the turn of the millennium has been freshly updated — and upgraded: It’s now reached $59 trillion.

Broker-dealers and asset management firms have long implored their advisor sales force to get a piece of this money in motion — part of the largest transfer of wealth in history.

Now the Center on Wealth and Philanthropy (CWP) of Boston College has released an update of its 1999 report that was the source for the oft-cited $41 trillion figure.

Importantly, the higher number, representing the amount of national wealth to be transferred over a 55-year period, does not signify an increase of $18 trillion.

That is because the $40.6 trillion figure from CWP’s 1999 study was expressed in 1998 dollars, which translates to $52 trillion in 2007 dollars.

The updated wealth transfer estimate, also expressed in 2007 dollars, is therefore $7 trillion greater — a significant finding given the ravages of the Great Recession, which impacted the finances of Americans making bequests and charitable donations at the start of the 55-year period under study (from 2007 to 2061; the earlier estimate was based on the 55 years from 1998 to 2052).

Indeed, the precipitous decline in growth that marked the Great Recession’s 2007 onset forms the back story that the report’s authors, John Havens and Paul Schervish, investigated in their wealth study.

While they found the loss of wealth to be pervasive, with the wealthy losing more in dollar terms, they found the impact of loss to be quite skewed in impact: the top 10% of households with net worths of $1 million or more lost about 21% of their wealth compared to an 81% decline in wealth for the 50% of households with net worth under $100,000.

The key reason for this disparate impact was the much higher levels of debt among the less affluent; liabilities, just like assets, are a factor in net worth and less wealthy households carry higher debt than wealthier households.

“Since the proportional reduction of wealth was smaller among the wealthy households that donate the most to charitable causes and that account for the majority of wealth transfer as compared with households at the lower end of the distribution, the recession’s impact on wealth transfer and charitable giving was somewhat attenuated,” the CWP report finds.

Nevertheless, the report estimates that had there been no Great Recession, wealth transfer in the current period under study would be some 25% greater — amounting to $73.3 trillion.

A key finding of the report of potential interest to financial advisors is a wave of new wealth transfer — growing both in frequency and in the amount transferred — by wealthy households aged 65 to 79. “This transfer was not evident before the millennium,” the authors write.

“We are told that more assets are being transferred via trusts, partnerships, direct gifts, and other vehicles of transfer during the lifetime of wealth holders than was the case 10 to 15 years ago.”

Meanwhile, Federal Reserve data indicates “consistently higher” inheritances in recent years than one would expect from estate tax data emanating from the IRS. Another finding of the report is that maintaining the high level of estate tax exemption initiated during the Bush administration (rather than reverting to 2001 levels) leads to significantly greater wealth transfer and charitable giving.

But perhaps the most important takeaway for financial advisors — and the broker-dealers urging them to help Americans pass on their great wealth — is that nearly all of that $59 trillion in motion comes from the very wealthiest Americans.

In terms of final estates (i.e., excluding lifetime gifts), the CWP report finds that just 5% to 20% of households with $1 million or more in wealth account for roughly 63% to 8% of transfer to take place during the 55-year period under study.

As for philanthropic giving, “roughly half the donations to charitable causes each year are made from households with less than $1 million in wealth; the other half are made from households with $1 million or more,” the report finds.

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